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The Secret Way to Profit from the U.S. Debt to China

Currencies / Forex Trading Aug 01, 2011 - 07:31 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleSean Hyman writes: Perhaps the biggest reason our country is facing a contentious debt-ceiling debate is because of the massive U.S. debt to China.

It's easy to forget that China is the world's largest buyer of U.S. Treasuries and it has as much to lose in this high-stakes game of chicken as does the United States.

Indeed, China's rapid growth over the past decade has resulted in a new paradigm.

Go back 10 years, and nobody worried about the U.S. debt to China. No one ever talked about the Chinese yuan replacing the dollar as the world's reserve currency. Or wondered whether the U.S. would ever owe China more than it could possibly pay.

And why would we ever worry about China?

At the time, the U.S. was the biggest economy in the world, with the most powerful markets and currency. When we walked into a G-7 meeting, we were used to getting exactly what we wanted. We said "jump" and the rest of the world said "how high?"

Back then, China wasn't even invited to those meetings.

But as you know, things have changed - even if the average American politician and citizen doesn't want to admit it.

We can no longer burst into a G-20 meeting and simply demand what we want. We must contend with the demands of China - the freshly minted economic superpower that happens to be our largest creditor.

Who's the Boss?
China has grown to be the second largest economy in the world now. And how did they grow rich?

Simple: They've saved while we spent. They invested while we went into debt. They went without while we lived beyond our means. We expanded and issued bonds to pay for our debt. China bought up those bonds and earned huge sums of interest off of us.

An ancient Biblical saying proclaims that: "The debtor is slave to the lender."

In this case, we definitely are slave to our lenders in China - whether we know it or not.

As you know, you don't tell your bank how much money you will pay them or when you'll be able to pay them back - they tell you. It's their right as your creditor.

China has the same right on a macro level. We have sold the Chinese our Treasury debt. Now they own us. When they say jump, it's our turn to say "how high?"

The writing is on the wall. The balance of power is shifting from the U.S. to China. And unfortunately, China knows it.

The "Back Door" to China Profits
Now if you know that China is gaining all this power, the smart move would be to buy their currency, right? After all, the Chinese yuan is in a good place to rally once the Chinese government finally allows their currency to free-float.

There's just one problem with that - you can't buy and sell the Chinese yuan in the forex market. That means you could miss out on the really big gains to be had in this currency.

Fortunately, there is a secret way to bet on China's continued strength and still make a killing in the forex market.

It's simple: You just need to buy the high-yielding and easily tradable Australian dollar in the spot forex market.

You see, the Australian dollar closely follows all of the news related to China. When we hear good news out of China, the Aussie dollar rallies. When inflation climbs in China, the Aussie dollar climbs.

The reason is pretty easy to understand - China needs Australia's resources.

As China continues to grow its economy at breakneck speed, that up-and-coming superpower must have natural resources to build out its expanding economy. The Chinese need things like iron ore and copper to make steel for their buildings and create components they need for their technology.

With commodity-rich Australia right next door, it's the most logical place for China to buy vital resources. China knows it; they already own huge stakes in Australia's mining industry for that very reason.

That means Australia will ride the coattails of China's growth story.

As a currency investor, you need only buy the Aussie dollar in the forex market to reap the big rewards from this knowledge.

If China is zipping along economically, you can be sure Australia will benefit from it. And the Aussie dollar will soar -- thanks to China's influence.

You simply need to remember: As goes goes Australia! When China's growth expands, Australia has good days ahead of it. When China's economy slumps, the Australian dollar will suffer as well.

And by buying the Australian dollar at the right time in the forex market (AUD/USD), you can snag gains of 100% or higher just by paying attention to what China does next.

Fortunately for us, keeping up with events in China is pretty easy - lately the media can't seem to give us enough information on the Asian giant.

But the "secret back door" connection that many forex traders don't make is to play China's rise with the Aussie dollar.

Bottom line: The United States' problems aren't going away, and China will be right there to profit as our country continues to falter. But you can take advantage of this new shift in global power simply by buying the Aussie dollar in the currency market.

[Bio Note: With the outlook for the dollar and the euro growing increasingly bleak, many of readers have asked us about currency trading. So we decided to respond by bringing on a new currency expert - Sean Hyman. Hymen is a veteran currency trader with more than 20 years experience. Watch for his columns on currency trading in Money Morning.]

Source :

Money Morning/The Money Map Report

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